What is an “Automatic Conversion” clause? – Convertible Note..

Convertible loans are used when parties wish to defer valuation of shares until a later date (typically in under a year), but the corporation requires funding to "bridge" the time until they can obtain long-term financing in the next equity round. Once the loan matures, the investor has the right to convert the loan into an equity stake in the company. This is a relatively simple transaction, and thus it can close quickly. It is especially beneficial for companies that believe they can hit their growth targets and raise a next equity round at a higher valuation. Since this is a loan, the investor does not have any shareholder rights. The investor can require a security interest in the assets of the company, which may be problematic under contracts with existing lenders. It is essential to include clear (and realistic) goals and milestones about the next round of equity financing in the convertible loan agreement.

August 3 2018

July 30 2018

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